Canada Stocks Rally to Almost Three-Year High as Gold Rebounds

Feb. 14 (Bloomberg) -- Canadian stocks are rallying the
most in three years, pushing the benchmark equity index to the
highest level since 2011, as economic growth accelerates and
gold rebounds from its worst year in more than three decades.

The Standard & Poor’s/TSX Composite Index climbed 18
percent since the end of June, the biggest advance over similar
time periods since April 2011, according to data compiled by
Bloomberg. The gauge closed at 14,001.65 yesterday, compared
with its bull-market peak of 14,270.53 on April 5, 2011. It is
still 7.1 percent below its record in June 2008.

Companies from Encana Corp. to OceanaGold Corp. are fueling
the gains after earnings beat analysts’ estimates and an
acceleration in U.S. and U.K. growth led the International
Monetary Fund to raise its global growth forecast. A rebound in
bullion following its worst annual return since 1981 sent a
gauge of 23 gold companies in the benchmark gauge up 26 percent
this year.

“It’s been a very bifurcated market in Canada for some
time, with the resource portion of the market suffering and the
non-resource side doing quite well,” Jeff Young, chief
investment officer of NexGen Financial Corp. in Toronto, who
oversees about C$900 million ($820 million), said in a phone
interview. “For the Canadian market to outperform you need both
sides.”

Canadian stocks are beating American equities at the start
of a year for the first time since 2010, with the S&P/TSX up 2.8
percent versus a 1 percent drop for the S&P 500 Index. At the
same time, the Canadian dollar is trading near a four-year low
after Bank of Canada Governor Stephen Poloz said he’s concerned
inflation is too low. Priced in dollar terms, Canadian stocks
are down 0.4 percent this year.

Biggest Industries

Banks and other financial firms account for 34 percent of
the S&P/TSX. Energy and raw-materials shares, which move with
the prices of commodities, make up another 38 percent. Last
year, financial companies climbed 19 percent, compared with a 31
percent drop in materials stocks, as gold fell 28 percent and
silver lost 36 percent. Nine of 10 industries have gained since
June, led by health-care stocks, technology companies and
industrial shares.

Gold has rebounded from last year’s plunge, climbing 8.1
percent in 2014 as demand for coins, jewelry and bars increased.
Of the 241 S&P/TSX companies, 23 are gold producers and sellers
that together account for more than C$100 billion in market
value, data compiled by Bloomberg show.

Budget Surplus

An improving outlook for government finances is also
helping the nation’s equities. Canada Finance Minister Jim
Flaherty’s latest budget projects almost C$45 billion in
surpluses over four years beginning in 2015, giving Prime
Minister Stephen Harper cash to potentially stimulate the
economy through increased spending and tax cuts. The budget,
presented Feb. 12, forecasts a budget surplus of C$6.4 billion
in 2015, following seven straight deficits as the nation
weathered a global recession and economic downturn.

Canadian stocks have gained this year as companies posted
fourth-quarter earnings that exceeded analyst projections by 110
percent, data compiled by Bloomberg on the 77 corporations that
have reported so far show.

Encana, the nation’s largest natural gas producer, has
rallied 8 percent this year, almost three times the S&P/TSX’s
gain. The Calgary-based company reported quarterly earnings that
beat analysts as it raised oil and liquids output.

Market Leaders

OceanaGold is up 111 percent since the Canadian market
began rebounding from its 2013 low on June 24. Third-quarter
earnings for the Australian producer with mines in New Zealand
and the Philippines exceeded analyst forecasts, the company said
in October. It’s scheduled to report fourth-quarter results on
Feb. 20, with analysts predicting a 31 percent increase.

Shares of Valeant Pharmaceuticals International Inc.
doubled last year as Canada’s largest drugmaker made more than
$9 billion in acquisitions. The stock climbed 13 percent on May
24, the day a person familiar with the negotiations said it was
close to buying Bausch & Lomb. The stock is up another 25
percent in 2014.

The global economy will grow 3.7 percent this year, up from
an October estimate of 3.6 percent, the IMF said in revisions to
its World Economic Outlook released in Washington Jan. 21,
citing accelerating expansions in the U.S. and U.K. Canada will
expand 2.3 percent this year, up from 1.8 percent in 2013,
according to the median estimate of economists surveyed by
Bloomberg.

Trailing America

Canadian stocks haven’t kept up with their American peers
for the last three years, data compiled by Bloomberg show. Since
the bull market began in March 2009, the S&P 500 has rallied 170
percent, twice the S&P/TSX.

Even with smaller gains, the Canadian equity index is more
expensive. It trades at 18.6 times reported earnings, 9.8
percent more than the S&P 500’s multiple of less than 17. The
spread between the countries’ valuations has surged since June,
reaching the widest since October 2011 earlier this month.

Strategists estimate the S&P/TSX, which had the 30th worst
2013 return of 94 country indexes priced in U.S. dollars, will
fail to surpass the S&P 500 again this year. They forecast the
index will climb 3.5 percent to 14,104 for all of 2014,
according to the average of six forecasts compiled by Bloomberg.
That compares with an average projection for the U.S. equity
index to rally 5.8 percent during the year.

‘Real Problem’

“Investors tend to extrapolate the most recent trend onto
the current and future trend, and that’s the real problem with
looking at the Canadian market right now,” Brian Belski, BMO
Capital Markets Corp. chief investment strategist, said by phone
Jan. 23. “You need to see earnings growth come in.”

Belski is calling for the S&P/TSX to fall to 13,575 this
year.

The S&P/TSX will be able to keep climbing so long as the
U.S. continues to expand faster and China keeps up its pace of
growth, said Matt Skipp, chief investment officer with Sw8 Asset
Management Inc. in Toronto. The U.S., the world’s largest
economy, will grow 2.9 percent this year, up from a forecast of
2.6 percent in January, economist estimates compiled by
Bloomberg show. The Chinese economy will expand 7.4 percent in
2014 after a 7.7 percent growth in gross domestic product last
year, estimates show.

“Canada is heavily dependent on China and the United
States,” Skipp, whose firm manages about C$40 million, said in
a Jan. 21 phone interview from Toronto. “For this rally to
continue, there has to be a real economic recovery in the United
States and some kind of market for commodities, globally.”